In an attempt to make stock trading more secure, Sebi plans to move to a process of calculating individuals’ financial strength based on income tax return (ITR). At present, individual investors entering the stock market are required to only declare their net worth to their brokers periodically but there is no need to submit any official document.

A Sebi committee, headed by T K Vishwanathan, may recommend such a step, sources said. If a suggestion for ITR-based income declaration is put forward, the regulator will start a detailed consultation process with market intermediaries. It is confident that since such a decision is aimed at mitigating risks in the stock and derivatives markets, it should be able to implement it in a few months, they said.

At present, while opening a demat account, an investor needs to just declare his net worth by ticking a box against given ranges of monthly incomes, starting with below Rs 1 lakh and going up to above Rs 25 lakh. The investor also needs to give an estimate of his net worth on a date not more than one year earlier from the date of signing the account opening form.

The Sebi board had recently approved that an individual investor can freely trade and take exposure in the stock and derivatives markets based on his own financial strength. In case the investor wants to trade beyond that limit, his/her broker has to do a thorough check of his financial strength before allowing him to trade in the market with higher limits.

According to market players, at times, to generate higher commission, brokers allow their clients to self-declare net worth levels that is much higher than what should be the actual levels if calculated properly. In turn, those higher trading volumes are funded by the same brokers who, in addition to commissions, also earn interest income from such funding. These practices increase the overall risk in the market. To mitigate such risks, Sebi is planning to ask every investor to furnish their ITR while opening trading accounts with brokers, sources said.